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4 Steps to Make a Cash Flow Forecast

In this current climate, it is important to have a realistic outlook on how your business is performing, both now and in the months to come. Producing a cash flow forecast is key to setting realistic short-term and long-term goals.

Forecasting is a vital task when running a business, regardless of the size of your company or the services you provide. Understanding the cash flow coming into and out of your business is key to not only predicting, but also delivering on short and long-term growth.

For many, calculating a cash flow forecast can seem daunting. But with the help of accounting software and a little know-how, it doesn’t need to be an overwhelming task.

Whether you choose to create a cash flow forecast for 3, 6 or 12 months – or all 3! – will depend on the requirements of your business.

But remember, no matter the time frame, what you’re creating here is a forecast, your predictions are not set in stone, as business priorities and circumstances will inevitably shift or change completely, you need to stay agile to succeed. Read on for 4 steps to create a cash flow forecast.

How does a cash flow forecast help my business?

By creating a cash flow forecast, you can fully understand how your business is performing currently and realistically plan where you would like to take your company in the future.

This could mean that you can expand your team, potentially move to a bigger office space or offer new products/services to clients.

Ultimately, it will give you a clear idea of where you stand: how much cash is coming in each month, how much is going out, whether or not you’re in a position to meet your obligations and where you can afford to expand.

By taking the time to plan, you can ensure that your business is sustainable.

Why is a cash flow forecast important?

Cash flow forecasts are important because of the visibility they offer to business leaders.

They’re worth considering at about every stage of business, regardless of your company’s size or services. From startup businesses, to SMEs and large corporations, business owners need to be aware of the balance between money coming in and money going out.

More money out than in brings with it serious challenges. Whether you’re not selling as much as you need to be, a fast-growing business because you are selling more than you can sustain, constantly chasing late payments or you’re simply not being paid on time, it leaves you at risk of being unable to pay your suppliers and employees in full and on time.

Even if you’re enjoying a healthy income now, no business is immune from unforeseen emergencies or a downturn in the economy. In this current climate especially, having a realistic outlook on your business will help to solidify your future.

How to prepare for a cash flow forecast

To prepare a cash flow forecast, start by collating all of your figures from the previous year, including sales and outgoing costs. This is the best way to predict your revenue for the next year and gain a clearer understanding of your outgoings.

This is the essential information that you need to set realistic goals for the business. It will give you a starting point to look at how your outgoings will look in the year ahead.

Reflecting on past performance will also give you an indication of your potential future revenue, as well as how that might fluctuate over the year.

We’ll come back to the finer details of how to prepare a cash flow forecast later, but for now, know that it starts with gathering information.

How do I create a cash flow forecast?

OK let’s get down to the details, how do you create a cash flow forecast?

There are a lot of different options depending on the complexity of your business, but we’ve brought together the four main steps involved to get things going.

1. Start with sales and the money coming in

Use your sales figures from the previous year to predict your forecast for the coming year, taking into consideration any new products or services you are now offering.

  • How much revenue will these products/services add to the previous year?
  • How many long-term contracts do you have that will stay steady from last year to next?
  • When do you expect a drop-off from these?
  • What targets are you giving your sales or marketing teams?

Producing a report of predicted sales that is as accurate as it can be is the first step to successfully forecasting your cash flow.

2. Control your expenses and the money going out

Once your sales forecast is completed, you will now need to look at your costs and outgoings. This, together with the sales forecast, will become your profit and loss forecast.

Include all of your day-to-day outgoings. Everything from employees’ salaries and rent for your office space, to software costs and any raw materials for production needs to be considered.

Think about when you will be forking out for these costs as well. Will they stay steady every month or will some quarters look a lot heavier than others in terms of expenses? What’s the delay between buying supplies and selling products? Any stock you hold means cash is tied up. It can be beneficial to reduce costs by buying in bulk, but this has to be weighed up against the cash tied up in that stock.

Taking this into consideration will mean that you can plan for more expensive months in advance.

3. Consider when you expect the money to come in

With a clear list of your expenses and sales, you need to think carefully about timings. If you sell a new contract in January, when do you expect that cash to be in the company?

Depending on your clients’ payment terms, it could be days or months before that money is in your business.

This may seem similar to the sales forecast you have just put together however, it is important to take the extra time to think specifically about cash flow and focus on when the money is expected to come into your account, not just the contract figure.

You could break this down by month of the activity for accuracy.

4. Finalising your cash flow forecast

Got a handle on your sales, expenses and when you expect money to come in? It is time to combine this information into a cash forecast in Excel to create the final cash flow forecast.

You will find cash flow forecast templates available online, but the goal here is simple:

  • For each month, calculate how much you are spending compared with how much you predict to bring in through sales, noting when that revenue is expected to be in your account.
  • From this you will be able to see if your business has either a predicted net cash inflow (made more money than you have spent) or a predicted net cash outflow (spent more money than you have made).
  • It is normal to see some rise and fall between months, as there may be certain periods where your outgoings outweigh income, for example if you are renewing a contract with a supplier.
  • However, if your outgoings are consistently outweighing your income, this could signal a fundamental problem in your business. Perhaps it’s time to review your pricing structure or cut back on any non-essential future expenses.

By taking action sooner rather than later you give yourself a solid chance of mitigating and solving problems.

Make sure you look at sensitive timings. If meeting obligations to pay staff or tax payments that have little flexibility is dependent on payment from customers which can easily slip by a week or more, then you need to think about how you manage those challenges should there be any delay.

Utilise your business bank or accounting software

There are some tools that you can use to make the forecasting process smoother and more efficient. Your business bank account will be able to give you an insight into the money that has come in and gone out of your business over the past year. Using this data can make the process of building your cash flow forecast easier than reviewing multiple different accounts.

Depending on your business, investing in accounting software could be the next step. This will not only give a clear view of your revenue and outgoings, but can also manage invoices, automate cash flow insights and manage tax and VAT.

How can I compare business banking and accounting software?

If managing your accounts is giving you a headache, business banking and accounting software can help you to get a handle on your business’ daily bookkeeping, as well as empower you with a complete overview on your finances and tax calculations.

A business bank account is a dedicated bank account that is used to keep business financial activity separate from an individual’s personal finances. It will let you easily determine your balance, outgoing payments, and income.

Accounting software takes things one step further and gives you, as a business owner, a constant view of your company’s finances.

The ability to keep a bird’s eye view on the money coming in and going out of your business, as well as your tax liabilities, is essential in planning operations as you start to scale.

Some software providers also enable you to connect to your business bank accounts so it can automatically pull information from the account when required. Taking the time to compare what your business bank account offers and accountancy software could give you the tools to create a quick cash flow forecast for your business.

Written by Nic Redfern

    Published on 24-04-2020

Finance Director at KnowYourMoney.co.uk and business adviser to SME's Nic is spokesperson for small and growing businesses with a strong understanding of the financial needs of business

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